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A Look Into Food Services (Part 1)

When people think about purchased services within a hospital, the first few areas they think about are departments that typically get outsourced like Housekeeping, Food Services, and Clinical Engineering. Today, I will spend some time discussing the decision process of one of these “big 3” spend areas: Food Services.

First, let’s define Food Services. They are the operations of your entire food department, which includes the cafeteria, retail, catering, and in-room dining.

It does not include Food Distribution; I will write a future post dedicated to this category.

Why Look at Food Services?

If your organization is like most, it is going through some sort of consolidation/partnership with another hospital or health system or you have just recently gone through a big change.

During these changes, or because of long-term mismanagement, you can end up with inconsistent operations across your different facilities. You might have some facilities operating completely in-house, some completely outsourced, or a hybrid version of the two.

Definitions:

In-house means 100% of the workers are full-time employees of the hospital;

Outsourced means 100% of the workers are employees of an external vendor; and

Hybrid means a mixture of the two but most likely only the management staff were employed by an external vendor while the “workers” are employed by the hospital.

We have also run across situations where different facilities of the same health system were outsourced to different food management vendors.

Very large IDNs also run into territorial issues where each hospital’s (or group of hospitals) purchased services director/VP manages their food departments differently. They don’t communicate or work with their counterparts which can lead to a lot of confusion for the staff that might work at different locations, as well as the patients that might be admitted at different locations.

Another very common occurrence nowadays are for hospitals to be part of a Regional Purchasing Coalition (RPC). We are even seeing RPCs partnering with other RPCs.

What to Expect

There are great opportunities for saving millions of dollars by aggregating your spend, but here is what you'll find out when you start trying to standardize your food services:

Different menus in the cafeteria and retail outlets

This means getting the food directors together to agree on the same/similar menu.

If you thought standardizing stents was hard, try standardizing chicken breasts and bacon!

Different pricing on all items in cafeteria and retail outlets

Seems easy to fix until you realize that some locations have a built-in margin and some offer their menu at breakeven.

Different employee discounts

This is the fun one. One location might offer 40% off for their employees while another offers 20%.

Who’s right? You can pay a consultant to find out the going rate in your area, but be prepared for the consequences when you implement them.

How would you like to be the hourly employee that gets told that their lunch will cost them 20% more because some consultant from Illinois said that’s what they should charge?

You can’t have that inconsistency in discounts across your health system.

Different Philosophical Opinions

One food department might be run as a revenue generator and have done cost and pricing studies to be efficient and maximize profits like a business.

Another might be focused on nutrition for their employees and patients, so they don’t offer low cost, high margin options like deep fried food and pizza.

Which one is right? Which one will you choose?

If You Currently Outsource

If you skimmed through the first part of this article thinking that this doesn’t pertain to you because you outsource everything related to food services, then you’re in luck; this section is for you. This section is also good for anyone looking to negotiate (or renegotiate) their agreement.

The first step is to pull out your agreement and see if there are any financial risks (or incentives) to your vendor as it relates to performance. You took a big risk outsourcing your employees to this vendor, so they should have more skin in the game than just losing the agreement.

Here are some common areas that you can add risk sharing language to the agreement:

Patient Satisfaction Scores - There should be a financial penalty associated with a decline in your patient satisfaction score for food service and quality.

This is more crucial now than ever since your organization can be dinged on medicaid reimbursements for lower scores.

You can also include a financial incentive if they help raise your score by X number of points. This is typically included if the operation is below average at the beginning of the relationship.

Sanitation Scores - There should also be a financial penalty if your cafeteria or retail locations receive a sanitation/food safety score below Grade A from the department of health. This is obvious but it is typically overlooked in the healthcare environment for some reason.

Retail Operation Performance - Speaking of retail locations, they should be operating these like a business. There should be an incentive to maximize revenues and a penalty if they fall below an agreed upon margin.

Guaranteed Savings - You outsourced because there would be savings, right? Put that savings into the agreement or at least 75% of it. If they won’t do it, then you need to question if they should be your partner or not.

CPI Expense Growth - Another common section that gets quickly overlooked is when the vendor bases their allowable percent expense growth on CPI (typically CPI-U). Don’t just agree to this; you can put a cap on it. All you have to do is add something like “or 3%, whichever is lower” right after their CPI percentage language.

Conclusion

There are many other terms included in an outsourcing agreement, but adding these will put you at the top of the class. You’ve worked hard and stressed enough about whether you should outsource or not. Now you need to finish strong and get the biggest bang for your buck out of the agreement.

In Part 2, we will discuss how to evaluate outsourced vendors, benchmarking metrics that should be included in the agreement and during quarterly business reviews (QBRs), and other terms you should include to maximize the value of the relationship.

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